Capital Allowance Claims: More on Section 198

When a person engaged in a “qualifying activity” as defined under section 15 of the Capital Allowances Act sells a building, it can have very serious tax implications both for the buyer and seller. By looking at the issues carefully, it is possible to arrive at a sale agreement that is advantageous to both the seller and buyer. In this article, we look at some examples that bring out the major implications a property sale can have.

Before we start, let us look at the basics. When a building used for a qualifying activity is sold, if the value fixed for the fixtures (“plant and machinery”) in the building is more than the written down value arrived at after deducting capital allowance claimed so far, the seller will be liable to a balancing charge, i.e. the person will have to pay back the tax relief already enjoyed. On the other hand, if there is a loss, no such repayment will be involved. One thing to note that property traders, developers and charitable organisations will not be eligible for any 198 elections, because they are not entitled to claim capital allowances.

If the buyer in a transaction is paying tax at a higher rate, the seller might opt to repay the full relief already enjoyed in return for a share in the higher relief that the buyer will be able to claim. In such a case, the parties might agree to fix the value of the fixtures at its full original value so that the buyer can claim capital allowances to the maximum. This agreement will be recorded in the Election Notice under section 198 and signed by both the parties.

The election can be made subsequently within two years of the disposal transaction. Once made and accepted by HMRC, it cannot be changed.

It is a common occurrence for the seller not to have claimed any capital allowances on the original building purchase. Yet the same seller might have claimed eligible allowanced on refurbishments of the building. Unless the buyer gets a full list of the plant machinery forming part of the building, and also details of the capital allowance claims made by the seller, the buyer might lose substantial amounts in potential tax relief. Buyers should hence insist upon getting full details about these.